Sourcing as a field of management evolved from Transaction Management to Category Management sometime in the 1990s. This had a tremendous impact on the way corporate leadership viewed Sourcing professionals. Sourcing moved from an organization that finalized pricing to an organization that provided expertise on the dynamics of supply market and helped companies drive value via the total cost of ownership. To make this transition companies hired MBAs with an ability to understand functional strategies and utilize supply markets to support them.
Evolution of Sourcing / Procurement Organization
Logically, the next evolution will probably see Sourcing professionals directly contributing to business strategy – moving from being a cost center to becoming an integral part of the business similar to its Marketing or R&D organization. For lack of a better term, I am calling the next evolution as Sourcing 3.0.
A Sourcing team’s contribution to business strategy will be through developing and managing strategic suppliers who can drive business outcomes such as increased revenue, reduced risks or reduced cost at a corporate level.
Strategic suppliers can perform a variety of role for an organization. Based on their involvement with an organization they might be referred to as – innovation partners, outsourcing partners, contract manufacturing service providers, wholesale or sales related service organizations, etc. Whatever their involvement or name they are referred to by, one thing they all share is making a significant impact on business outcomes. Traditionally, these suppliers were considered out of scope for Sourcing organizations because they required different skills and toolkits than currently exist, and businesses preferred to manage them directly.
Leading Chief Procurement Officers (CPOs) during our interactions recognized strategic suppliers as an opportunity area but highlighted the issues with lack of toolkits and skills in their organization to effectively engage these suppliers.
What are these different skills and toolkits?
Working with strategic suppliers requires two key skillsets – a collaborative mindset and an analytics based approach. This is different from the approach used for category management where market / competitive forces drive efficiency.
As an example, one of the tools we have successfully used is the “Should Cost” modeling. We have used the “Should Cost” models across many different industries and corporations where we readily shared the information with the strategic suppliers. This approach requires financial and analytical expertise in addition to the commercial expertise typically required from a buyer in a Strategic Sourcing organization. It also requires “influencing skills” so that suppliers view it as a win-win relationship and look at the organization as true partners. These multi-year relationships require careful ongoing relationship management by linking performance incentives to business outcomes. Sourcing organizations will have to play an active role in making these relationships successful because their success will drive the success of their parent company.
Example of a toolkit – “Should Cost” modeling
Sourcing organizations have been developing cost models for specific requirements, but this is not widely practiced. Developing cost modeling toolkit becomes critical for strategic suppliers as understanding the underlying costs can identify opportunities for outcome improvements.
This concept is sometimes confusing to our clients as they think the objective of cost modeling is to reduce costs, and they do not understand the linkage between the improvement of outcome or service.
Cost modeling is a tool that can also identify areas where cost could be added or redirected so as to improve service or quality of the product in addition to making the operation more efficient. The level of sophistication and collaboration required for “should cost” modeling for strategic suppliers is far greater as it requires a greater level of trust from both parties that such information will be used in a constructive fashion.
An example of “should cost” modeling below illustrates the value it can bring to decision making. A specialized call center contract at a Pharmaceutical company specified that the provider maintains infrastructure at a particular location with a set of stringent technical requirements. The requirements changed significantly over time due to changing business environment; however, both companies struggled to figure out how best to restructure their relationship.
Should Cost modeling showed significant potential for service improvement by spending more on representatives who attend the phone and less on overhead areas such as program management and administration. The change in contract structure was also a win for the provider as they now have more flexibility in setting the infrastructure and location.
Restructuring of Strategic Call Center contract through Should Cost Modeling
How then do we affect change?
Creating these new capabilities could be the change agent that will evolve the Sourcing organization from a cost center to becoming an integral part of the business. This is similar to the category management expertise that led to an evolution of the Procurement organization to a Strategic Sourcing organization in the late 1990s and early 2000s.
In my subsequent posts, I hope to explore how an organization can transform itself into a Sourcing 3.0 organization.